Sharekhan's research report on HCL Technologies
HCL Tech’s commentary at its US Investor Day indicated demand concerns due to macroeconomic impact and higher-than-expected furloughs. Management now expects FY23 CC revenue growth to be at lower end of its guidance of 13.5-14.5% while they maintained 18-19% EBIT margin guidance. We see our FY23 CC revenue growth estimate of 14.5% at risk. The management hinted at increased vendor consolidation as clients move away from boutique firms and weak vendors. New growth opportunities driven by digital transformation and cost optimisation. Focused on customers with large technology spends (85% of FY22 growth from ~50 accounts (35 existing clients and 15 new accounts). We believe that uncertain macros could affect global IT spending visibility for CY2023E especially from discretionary/BFSI verticals. This could affect growth for the IT sector with higher impact on Tier-2 IT players because of vendor consolidation. Nifty IT Index has run-up by 9% since Oct’22 (post Q2FY23 earrings season) and we thus advise investors to be selective with a focus on companies with growth visibility and reasonable valuations.
Outlook
We maintain a Buy on HCL Technologies with an unchanged PT of Rs. 1,140, given strong growth in application services, good dividend payout, healthy order intake and reasonable valuations (trades at 16x/14.4x FY24E/FY25E EPS).
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